Despite the fact that only 35% to 40% of employers offer LTD coverage as an employee benefit, growing a long-term disability customer base has become increasingly more difficult.
This is largely due to the fact that carriers tend to fight over existing business creating premium churn, rather than working to grow the market with new premium sales. In fact, over the last 6 years alone, only 3 of the top 10 disability insurance providers have actually grown their in-force cases, reflecting lackluster growth in a market full of potential new sales opportunities.
The way carriers underwrite and price business may be one of the reasons for this lack of sales growth and constant business churn. While the technology and tools of underwriting have improved over the years, the basic methods for selecting and pricing risk have changed very little. Though actuaries are trying to better pinpoint pricing, the census and review of the business have remained very much the same since 1978.
To determine a premium pricing quote rate on cases, underwriters currently use 3 main sources of information, including industry and census demographics and a discount program. There are several ways that carriers can improve this process for underwriters and increase broker efficiency in delivering products to the market.
Leverage intellectual capital to match employee groups with coverage plans. Over the years, insurance providers have learned which LTD coverage plans work better for a variety of specific employee groups such as those in manufacturing and health care. Because of this knowledge, underwriters and/or field sales personnel should be able to more effectively match coverage plans with industry and demographic groups and price accordingly. This simple pricing strategy could be used to enhance sales.
Take advantage of publicly available data. Another tactic to consider when targeting new cases and developing pricing is to utilize existing publicly available data on individuals as well as groups. This information is available on the Internet or for purchase from a variety of outlets. Consumer-oriented and catalog companies already use demographic data, credit scores, household information and many other sources to target customers. Why shouldn’t insurance providers do the same?
Take a look at the hospital industry–it provides extensive amounts of publicly available information that can be leveraged to help carriers better price disability products and prospect for new business. Disability RMS has analyzed quantitative data from numerous sources including Solucient’s “The Comparative Performance of U.S. Hospitals–The Sourcebook 2003.” Hospital occupancy rates, hospital profitability measurements, and cost containment and expense management information were examined. The analysis revealed a compelling link between claims experience and hospital occupancy rates, and found that higher occupancy rates correlated to higher claims experience.
Armed with this type of information, carriers can more accurately price products for these institutions and better create a highly targeted prospecting list for their brokers. Other types of information that carriers should consider leveraging to build prospecting lists include: facts about home ownership, credit scores, food purchased and physical activity level–all of which is available from a variety of sources.
Credibility formulas alone equal underpricing and churn. Another area of improvement can be found within the midsize case market and the use of experience rating. For years, underwriters have chased the “great case” or the “no-claims-in-three-years” case and have driven prices to an unsustainable level. The believability or credibility of a midsize case may be grossly overstated. Credibility formulas generally do not account for the predictability of the past. Carriers need to better understand the case history, the quality of the information being underwritten and changes in the environment. Using a purely formulaic approach to underwriting midsize cases will likely lead to underpricing and churn.
Furthermore, credibility formulas should be significantly adjusted on a case-by-case basis for these midsize groups. Some carriers now employ intricate methods to pinpoint how much credibility they are going to attribute to a midsize case. Factors such as plan design and history, actual-to-expected claims review and quality of data come together to adjust credibility, up or down.
New data resources: Think outside the information box. In an age where information is easily accessible, companies now have the ability to gather and apply data previously inaccessible to the insurer without asking brokers. Nontraditional information sources could hold the key to better underwriting allowing carriers to match the plan census to the demographic.
The opportunity and the tools necessary to grow in-force blocks exist. Utilizing contemporary information sources and purposefully integrating nontraditional demographic data into underwriting models will drive better or more stable pricing and support longer-term customer relationships.